Riley's gamble may pay off for Jefferson County

The anti-gambling governor is taking one of the biggest gambles of his political career.

Gov. Bob Riley is betting he can convince Wall Street creditors to settle for less than they'd like in a deal that would solve Jefferson County's $3.2 billion sewer-bond debt crisis.

We'll see in the next few days or weeks who holds the winning hand. For the county, the stakes couldn't be higher. It can work out a payment plan with creditors and move on, or it can file the nation's largest municipal bankruptcy and replace Orange County, Calif., as the poster child for fiscal bungling.

If Riley and creditors reach a deal, he's a hero. If the county ends up bankrupt, some will rush to blame Riley, even though he entered the game only after eight months of County Commission ineptitude.

Don't bet against Riley, even though he failed spectacularly at his biggest political gamble -- proposing a $1.2 billion tax increase five years ago, which voters smacked down. This time around, the governor holds more good cards in his hand:

-- The threat of bankruptcy. Nothing has helped the county negotiate from strength more than letting creditors know it is serious about filing bankruptcy. And nothing brought that threat home more than when David Bronner, the state's pension fund chief, proposed the county file bankruptcy and sell its sewer system to the Retirement Systems of Alabama.

Throngs of citizens and elected officials loved Bronner's plan, and Wall Street noticed. Interestingly, after Bronner on Aug. 15 told local elected officials the county should ready a bankruptcy filing to force the Wall Street "money train" to negotiate, he has been silent.

-- Ongoing criminal investigations. There's nothing like federal criminal and civil probes of the municipal bond market to get the attention of investment bankers. Add to that New York Attorney General Andrew Cuomo and other regulators rattling cages with investigations into auction-rate securities, forcing at least nine banks, including JPMorgan (Jefferson County's largest creditor), to buy back as much as $50 billion of the securities.

-- Mounting civil suits around the country. Last week, the Erie, Pa., School District sued JPMorgan in federal court, claiming the company pocketed more than $1 million in undisclosed fees -- 10 times what the district said it should have paid. It's worth noting that Porter, White & Co., former financial adviser for Jefferson County, earlier this year said the county overpaid as much as $100 million in fees on a series of swap transactions.

Already, a number of issuers have sued JPMorgan and other banks, brokers, advisers and insurance companies over derivatives, The Bond Buyer reported last week. And the sewer-bond debacle has led to at least two suits in Jefferson County.

All that may be just what Riley and the county need to reach a deal with JPMorgan and other creditors.

On Aug. 29, representatives for all the major creditors and insurers met for the first time with Riley and county officials, just days after what once was a hopelessly divided County Commission agreed to make him the lead negotiator.

Riley's plan would replace the county's floating-rate bonds with fixed-rate securities and allow the county to pay off the debt with revenues from the sewer system. Bondholders would accept lower interest rates and give the county longer to pay off its debt. The county also would raise sewer rates by no more than 2.85 percent a year if steps to collect delinquent bills and streamline the system fail.

Riley said creditors would respond this past week, but they didn't. Friday, Riley spokesman Jeff Emerson said "we expect to receive a response soon, probably on Monday."

It'll be interesting to see how creditors respond. They can accept the offer. They can reject it, although county officials have made clear the next step is bankruptcy. Or creditors can ask Riley to sweeten the pot. They could, for example, say they want the excess money from the county's 1-cent sale tax for school construction, a key part of the county's first two unsuccessful bailout plans.

Riley doesn't have a particularly good poker face, but all things considered, he has about as strong a hand as he and the county could hope for. It's not a royal flush (we've already seen that with far too much sewer ratepayers' money flushed down the drain from corruption and incompetence).